Astana, 9 June (BTA/GNA) – Having a government to steer Bulgaria on a clear course to eurozone entry is important because it will enhance the stability of the country’s financial system, IMF Managing Director Kristalina Georgieva said in a BTA interview Friday. She spoke to BTA on the sidelines of the Astana International Forum taking place in the capital of Kazakhstan.
She also said that it is important for the government to have strong support for the reforms it has promised to carry through.
Full text of interview follows.
Ms Georgieva, how do you see Bulgaria at this particular moment?
It is good for the economy of Europe to have a government [in Bulgaria] that is committed to guaranteeing the country’s participation in EU programmes and that steers the country on a clear course to entry into the euro area. This is important for Bulgaria for many reasons, but above all because it will increase the security of our financial system. It is also important for Bulgarian people – to give them the peace of mind that there is a working government that is taking prudent decisions and which has strong support to implement the promised reforms.
What do you think of the shape of the European economy after the revision of Germany’s GDP data a few weeks ago, which showed that the country is in a technical recession?
We will present our assessment of the euro area in the middle of this month in Luxembourg. What I can tell you is that the European economy has slowed down considerably, with the IMF forecasting GDP in the countries using the euro to increase by 0.8% this year, which is still a positive growth. The euro area economy has, however, shown much greater resilience against the backdrop of the war in Ukraine than was expected both in Europe and in the IMF. This was helped by the milder winter, which mitigated the impact of the gas crisis.
Today, the priority for the euro area is to fight inflation. We are already seeing positive results from the increase in interest rates, but these results are not yet sufficiently reliable in the part of prices that directly affects ordinary people. We expect the conversation to move from how high interest rates are going to be to how long they are going to stay high.
In this context, our forecasts are for inflation to be above the ECB’s target rate [of 2% per annum] by the end of 2024 and even early 2025. Why this is a problem? Because the longer interest rates stay high, the more they affect borrowing and lending and consumer and investment activity, and then the risk of a deeper and larger slowdown increases.
At this stage, the IMF projects 2024 eurozone growth to reach 1.4-1.5%. This is based on the hot labour market and expectations for consumer activity.
Some of the central banks of the world’s major economies have started to signal a pause or a halt in interest rate hikes. Do you think it is possible to see such a process in the coming months?
What we are seeing in terms of consumer activity and labour market activity does not yet provide a full guarantee that it will stop the rise in key interest rates. We have presented our assessment of the US economy, and our view there is that the possibility of another step up for base rates to be able to bring that activity down has not been ruled out. The situation around the Credit Suisse and the problems of some regional banks in the US, like the saying that a coin has two sides, has also led to demands for higher reserves at banks, causing a credit squeeze, which in turn slows inflation.
Our most important message is that we are in a period of very high uncertainty and therefore governments and central banks need to look at what the data is showing them and be prepared to adjust the exchange rate accordingly. And there is nothing wrong with having to adjust, because with such high uncertainty the only right approach is being flexible.
BTA/GNA